Is Gold About to Rally? USD Index and Crude Oil Prices Suggest Otherwise

Congratulations. Let's all take a collective deep sigh of relief. Instead
of a new crisis, we're just going to keep having the same old one.

Greeks voted to stay in the European Union with a narrow victory for the center-right
New Democracy party. A global crisis has been averted--for now. But as we take
a deep sigh of relief let's keep in mind that the euro is already on a slippery
slope to oblivion.

Let's face it. A Greek exit is already a forgone conclusion for many. Now
it's Spain's turn to headline with its bond yields soaring to new euro-era
highs. Spain's economy is almost twice the combined size of Greece, Ireland
and Portugal, countries that have already received some form of eurozone bailouts.
Spain looks poised to become a domino.

In the long-term Euro Index chart, we see that as the USD Index has reversed
and moved higher, the Euro Index has reversed and moved lower. The previous
move above the declining red support-resistance line has been invalidated and
the situation is now more bearish than not for the euro. This is consistent
with a more bullish than not outlook for the dollar.

The recent rally in the Euro Index could have been based upon the improved
outlook in Greece. With the New Democracy winning the election as expected,
investors may now be focusing on Spain and the problems of other countries
causing the implications here to be bearish. Favorable outcome of the Greek
elections appears to have been in the price and we saw a "buy the rumor, sell
the fact" type of action.

And the dollar? As euro declined, it rallied.

We begin this week with a look at the long-term USD Index chart (if you are
reading this essay on sunshineprofits.com,
you may click the above chart to enlarge). The index appears now to have completed
the verification of its breakout. About one half of the previous upswing has
been corrected and the index has declined more or less to the lower of the
major support lines. It is now moving higher once again.

In the short-term USD Index chart, we can see the recent correction and subsequent
reversal. The index closed above the short-term declining resistance line,
which is the higher one - based on intra-day highs (relative to the line based
on daily closing prices). The situation here is therefore bullish from a technical
point of view. We don't describe it as clearly bullish because the breakout
has not yet been confirmed. The index has not moved considerably above the
declining support line and has only closed above it one time. Two more closes
are needed to confirm the move and then the situation would be better described
as very bullish.

Consequently, the situation in the USD Index is bullish and this has bearish
implications for the precious metals, which you can see in the table below.

The Correlation Matrix is a tool which we have developed to analyze
the impact of the currency markets and the general stock market upon the precious
metals sector. We see a bit of a weaker link between gold and the USD Index
this week. This link appears to be getting stronger however, based on the 10-day
column.

The impacts of the currency market and the general stock market appear strongest
upon silver. They likely contributed to its heavy price decline on Thursday
as the USD Index rallied while stocks declined significantly. Overall, the
implications going forward are bearish for the precious metals sector taking
into account the USD and Euro Indices.

Before summarizing, let's take a look at one more market that can tell us
something about the possible future moves of gold and silver prices. Namely,
let's examine the crude oil chart.

In this long-term chart we see that oil prices continue their breakdown.
This chart suggests that oil is likely to decline much more (to 74 or likely
to 65 or even lower) and that gold prices have merely seen a small pause
in their downtrend, much as was the case in 2008. The implications here are
bearish for gold and the entire precious metals sector.

The recent pause in declining prices for crude oil was quite understandable,
as multiple support lines were in play. The consolidation now appears to be
over and considerably lower prices could be seen in a trend similar to 2008.
The implication here for gold is that the recent correction in gold prices
could very well be over and major price declines just ahead. The situation
is quite bearish for precious metals investors.

Summing up, based on the situation in the currency markets and in the
crude oil, the outlook for the precious metals sector is quite unfavorable.
Yes, precious metals are still in a secular bull market and are likely to move
much higher eventually, but there's a huge difference between "eventually" and "now" and
it seems that a decline will be seen first. More details are available in the full
version of this essay.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
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